Hopes of an interest rate cut by the Reserve Bank of India (RBI) in its 18 June meeting and falling global oil prices triggered a rally on the Indian stock market last week as funds and traders bought bargains. After starting on a cautious note, sentiment changed following comments from RBI deputy governor Subir Gokarn that falling global oil prices and declining core inflation and economic growth gave RBI room to lower interest rates. Taking the cue from Gokarn’s remarks, traders and funds resorted to fresh buying in rate-sensitive stocks such as banks, automobile makers, real estate and infrastructure firms.
Sentiment across the world also remained positive as hopes of global stimulus remained high, especially after China surprised with a 25 basis points interest rate cut on Thursday to shore up slackening economic growth, its first rate cut since the depths of the 2008-09 financial crisis. One basis point is one-hundredth of a percentage point. The impact of the rate cut was softened by remarks by US Federal Reserve chairman Ben Bernanke that dimmed hopes for further stimulus. Conditions in the euro zone worsened with a downgrade by Fitch of Spain’s credit rating to BBB with a negative outlook, just two notches away from junk status. Hopes of concentrated efforts in the euro zone to handle the crisis restricted stock market losses. Over the weekend, euro zone finance ministers agreed to lend Spain up to €100 billion ($125 billion) to shore up its teetering banks. Spanish authorities said the bailout is sufficient enough to handle the current crisis.
In China, weekend data related to industrial output, retail sales and inflation was satisfactory as industrial output remained better than the pervious month and also slightly above expectations, while retail sales remained slightly lower. The Spanish bailout and the Chinese data will boost Asian markets on Monday, but caution will prevail till the outcome of election results in Greece early next week.
At home, sentiment is likely to remain positive. The cues from forex markets need to be watched carefully though the government has been taking steps to contain the slide in the rupee’s value. The rupee has still not stabilized and this is weighing heavily on the markets. This week, economic indicators including India’s industrial output for April will be released on Tuesday. This data is critical, especially after March’s disastrous performance. This data will also have a bearing on RBI’s interest rate decision. Apart from this, the monthly wholesale price inflation numbers will also be watched closely on 14 June. A low inflation number will make the case for an interest rate cut strong. In the meanwhile, markets will remain edgy till the final outcome of RBI’s 18 June meeting. Overall this week there is a lot of data to churn in India.
Technically, the outlook for the Indian stock markets remains positive. On its way up, the benchmark Nifty index of the National Stock Exchange is likely to see its first resistance at 5,133 points, which is an important resistance level. If the Nifty survives this and manages to hold around this level, and even better settles above this level, then it would be a positive. The next important resistance would then come at 5,178 points. A probability analysis of momentum suggests there is close to a 84% chance of profit-selling around this level. But this would not threaten the short-term momentum in the Nifty, which means that though there would be profit-selling around this level, which may bring down the Nifty lower, it will not alter the positive trend. If the Nifty closes above this level, and volumes remain high, the next resistance target would shift to 5,256 points.
On the way down, the Nifty has its first support at 5,011 points, which is a moderate but important level. Any fall below this with good volumes or close below this level would be bearish in the immediate term. The next support is then placed at 4,954 points, which is a good support. If the Nifty falls below this level with good volumes, or settles below this level on closing basis, it would mean further weakness. The Nifty has its next support at 4,881 points. It is likely to see strong support at this level.
Among individual stocks, this week Rural Electrification Corp. Ltd (REC), ACC Ltd and Welspun Corp. Ltd look good on the charts. REC at its last close of Rs169.60 has a target of Rs175 and a stop-loss of Rs163. ACC at its last close ofRs1,147.10 has a target of Rs1,173 and a stop-loss of Rs1,115. Welspun Corp. at its last close of Rs123.70 has a target of Rs127.50 and a stop-loss of Rs118.50.
From my previous week’s recommendations, Jet Airways (India) Ltd gained as much 21.53% during the week. Needless to say the stock hit its target easily. GAIL (India) Ltd also met its target comfortably, but Balrampur Chini Mills Ltd missed it by a whisker and remains a valid recommendation for this week.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at firstname.lastname@example.org.
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